Paybox (PBOX) – Reverse Stock Split – 50% upside – Cancelled

Current Price –$0.55

Offer Price - $0.8

Upside – 50% ($250 for holders of less than 1000 shares)

Expiration Date - TBD

SEC Filling

Background

Paybox Board of Directors decided that the costs of being an SEC reporting company outweigh the benefits and, thus, it is no longer in company’s best interests or the best interests of stockholders, for PBOX to remain an SEC reporting company. To deregister the company needs to have less than 300 shareholders. To achieve that the company is proposing 1-for-1000 reverse stock split and cashing out stockholders (at $0.8 per share) who own less than 1000 shares. Expected annual savings for the company are in the range of $346k-$425k compared to $6.5m market cap and $8m in annual revenues.

Stock is illiquid, but at the moment of writing there is a seller at $0.55/share.

Source and Amount of Funds

Management anticipates that the total cash requirement for the reverse stock split will be approximately $420,000. This amount includes approximately $180,000 (equivalent to 1.7% of the shares outstanding) needed to cash out fractional shares, approximately $210,00 of legal, accounting and financial advisory fees, approximately $5,000 for transfer agent costs and approximately $25,000 of other costs, including costs of printing and mailing, to effect the reverse stock split.

The cash requirements will probably turn out to be much higher eventually, especially with regards to amount required to cash out fractional shares - company currently estimates only 225 fractional share accounts. This is likely to change after smaller shareholders start acquiring odd-lots specifically to benefit from this offer. However, due to low liquidity the number of fractional shareholders is likely to remain limited.

Company had $2.6m in cash as of Sep 2016 and could potentially buy out 25% of the shares outstanding if necessary.

Risks and Mitigants

The biggest risk with these types of reverse stock splits for nano-caps is that transaction gets cancelled after to many fractional accounts buy into it, and it no longer pays-off for the company to cash out all newly minted odd lot accounts at a premium. Hancock Fabrics (HKFI) is a perfect example of such cancellation. Shares dropped subsequently after all odd-lot holders started selling following the cancellation. HKFI filed for bankruptcy this year.

However, I believe PBOX deal is likely to go through as described:

  • Firstly, majority (60%) of stock is owned by insiders and they seem to like the idea of cashing out smaller shareholders and in turn increasing their own stake in the company.
  • Secondly, company is operating profitably and generates cash. 2015 has been especially good year for the company, when it generated $1.5m in cash vs $6.5m market cap currently. The company lost couple of clients recently and therefore 2016 performance has not been as great, but PBOX still operates above break-even If performance ever returns to 2015 levels, then at current prices PBOX is a real bargain. So it is not hard to see why insiders might want it all for themselves.
  • Thirdly, even if the amount to cash out fractional shares increases 10x compared to management’s estimate (unlikely due to low liquidity), this reverse stock split would still be a great deal financially – $2m expense vs $0.4m annual savings + increased ownership % for insiders.
  • And lastly, the company seems to have a viable business model (software for working capital management). Despite being nanocap PBOX largest clients are HP, IBM, Siemens and etc. Over the last couple of quarters PBOX launched new product and started on-boarding new banking clients. Latest conference calls provide decent updates on the recent business developments – not many nano-caps with $6m have regular and informative calls with investors.

66 COMMENTS

    1. dt

      The filling only says that this reverse split will be completed promptly following shareholder meeting. Meeting date has not been set yet, so really hard to tell.
      Ordinary shareholder meeting usually happens at the end of May, so would assume that this Special meeting happens before that. If company’s performance is improving as suggested by management, then the insiders should be interested to close this asap, before the improved performance is reflected in public financials. But that is my speculation only.
      Would expect the company to release the date of the Special Shareholders meeting shortly.

  1. Joe Ern

    Interesting. So the play is to buy 999 shares and wait for the reverse split and then the cash just shows up in the account and the shares disappear? I just bought 999 @0.57. Let me know if there is anything else that I must do like make an election or something like that. This by itself will almost pay for your sites membership for the year. Sweet (if it works out)! Good risk reward on this one for sure.

    1. dt

      That’s exactly the way it should work.
      But keep in mind that the higher the number of such odd-lot holders like you and me – the higher is the risk that the transaction gets cancelled. That is what happened with HKFI.

  2. dt

    Yesterday’s volume is 463k shares. Assuming all buyers were odd lots, this means additional 463 fractional accounts. or incremental $0.37m expense for the company to carry out the reverse split. And that is from yesterday’s trading alone. There might have been some day traders involved, so the actual incremental number of fractional accounts is probably lower.

    Still my expectation was that shares will drift fast closer to $0.8/share, making it unprofitable for new odd lots to buy into this deal. There is clearly a very willing seller/sellers at the levels of $0.6-$0.65 – maybe even one of the larger insiders is cashing out. I did not expect that.

    If these high volumes persist, the likelihood of deal getting cancelled will increase significantly.

  3. Joe Ern

    It occurs to me that this is much like calculating pot odds in a poker game. We need to assess a probability of the deal closing in order to decide whether to cash out early. If you think the odds of closing is 50%, then cashing out at 1/2 way to $0.80 (or in my case $0.69) would be the wisest risk reward decision and earlier and im leaving money on the table and any less and I would be taking too much risk. Based on your past experience and this new information (trading volume), what do you now believe the odds of this closing at $0.80 is now with all available info (I realize it is just a guess but an educated one)?

    1. dt

      As you suggest, this can only be a guess. If trading continues at current volumes for the next week or two, then I believe the deal will get cancelled.

  4. Michael Lax

    Do you need to register the shares in your name, or can it remain in street name?

    1. dt

      The filling says you can be beneficial owner as well. But you should check with your broker, how the broker will treat your shares.

      “What if I hold fewer than 1,000 shares of common stock and hold all of my shares in street name?

      If you hold fewer than 1,000 shares of our common stock in street name, your broker, bank or other nominee is considered the stockholder of record with respect to those shares and not you. It is possible that the bank, broker or other nominee also holds shares for other beneficial owners of our common stock and that it may hold 1,000 or more total shares. Therefore, depending upon their procedures, they may not be obligated to treat the reverse stock split as affecting beneficial owners’ shares. It is our desire to treat stockholders holding fewer than 1,000 shares of our common stock in street name through a nominee (such as a bank or broker) in the same manner as stockholders whose shares are registered in their name. However, we or our transfer agent, Manhattan Transfer Registrar Company, may not have the necessary information to compare your record holdings with any shares that you may hold in street name in a brokerage account and these banks, brokers and other nominees may have different procedures for processing the reverse stock split. Accordingly, if you hold your shares of our common stock in street name, we encourage you to contact your bank, broker or other nominee.”

  5. bellwether

    a few thoughts on the above.
    -are we overestimating how many existing shareholders actually read the 12/30 filing? Saw the price spike on a dog stock and wanted out at this price.
    -even if they knew about the offering, maybe didn’t want to wait unknown number of months for 80c. bird in the hand, similar to merger arb – existing shareholders leave early – they were here for the company and the upside it represented – replaced by special situation guys.
    -if I owned say, 2500 shares and knew about the offering, maybe I sell 1501 at an ok price, just to participate in the arb myself for the remaining 999?
    -anyone see there were 999 trades happening in the days prior to the 12/30 filing? Seems suspicious, but also tells us that insiders are on board with the trade.
    -who would go through the trouble of an 80 page filing, fairness opinion on the 80c valuation, etc., and not go through with this? Their advisors have to have told them to expect some arb activity. Maybe their advice was file on 12/30 (over holiday) and hold special meeting ASAP to minimize arbs? idk
    thanks for post – interesting situation

    1. dt

      Hi, I think the crucial factor here is the buyers rather than the sellers. It is clear that the buyers are mostly odd-lots, and who or why sells is less important here. Company’s decision will be based on the number of odd-lot accounts that need to be cashed out. PBOX has plenty of cash to buy-out high number of these fractional accounts and if the business is gaining traction, maybe they will do just that.

      Management (who are also owners of 60% of the company) are clearly motivated to get this deal done. Otherwise as you suggest they would not have gone through all the trouble. But if there are too many fractional accounts, they might be simply unable to carry it out, despite their best intentions.

  6. Jim Rivest

    All that cash is not available for odd lot purchases. This company is tiny and they deal with large customers who will want to make sure they are financially stable, so a good deal of this cash has to remain on the balance sheet. Several hundred 999 orders just in the last few days. I think it now 50-50 that the deal is cancelled or terms are changed.

    When MCEM did their deal, they originally stated street-held shares were included. When lots of 599 shares were purchased, they then decided only registered shares would be purchased in their ‘going dark’ transaction. The strange thing in that case was they had plenty of capital to do the deal, so they could have sold their richly-priced security portfolio and bought their own stock much more cheaply.

    I think in time, we see these deals go the way of the dodo bird or changed to stop the latecomers from profiting. I’ve seen several small banks ‘going dark’ cancel their deals because they became too popular. Others, have back dated the deals and will only buy shares owned prior to their ‘going dark’ filings. I think we may see more do that.

    I remember the Kerr-McGee ‘going dark’ deal sweeping the internet with everyone buying 199 shares for no proration. Icahn saw the same thing and forced a change in the terms to eliminate any odd lot preference. So no sure thing when these get lots of press.

    1. dt

      Two things might be different in this case:
      1) Investors are not pilling into PBOX odd-lots blindly – so past lessons seem to be learned. Volume is significantly lower over the last two days and spread remains large. So market get’s the risk of cancellation.
      2) Motives of insiders are not fully clear here. If business started gaining traction, insiders might be willing to cash out the remaining shareholders on the cheap before better performance is reflected in financials. Just speculating here, but if revenues reach the levels seen in 2015 and continue to grow (and that is quite possible if new clients mentioned during the call materialize in $$), then equity would be worth multiples of today’s price. Having said that, it is also entirely possible that management is simply looking for ways to prolong their reign on the declining cash-pile, and therefore look for easiest cost cuts outside their own salaries.

      With regards to spending the whole cash balance on the reverse split – I agree that this is unlikely. My point was mainly to show that if insiders wanted (and if the business started producing cash again) the company would be able to cash-out majority of the stock held by non-insiders.

    1. dt

      Brokers usually do not allow this (or it is very expensive). You would have to acquire shares through banking company, but I am not able to advice you on any names. I use IB only.

  7. Joe Ern

    What would happen if they didn’t buy you out because you didn’t hold directly? Do you end up as a minority shareholder in a private company completely illiquid forever?

    1. dt

      Based on info in the filling, the company will still be listed after the reverse split. So you should still be able you sell your shares even if you do not get cashed out.

      1. Ben

        I wonder how this actually would work in practice, as technically at this point you would own 0.999 new shares, which might be difficult to trade!

        1. dt

          I think if the company decided to go only after record holders, then it would do a reverse-forward split and in this way you would simply own the same amount of shares that you do currently after the transaction.

  8. Daniel Trynoski

    I see this is now on seeking Alpha. Is it still worth holding out for or is the chance it will be cancelled over 50%?

    1. dt

      Daniel, there is no way to tell the chances of this transaction getting cancelled as it really depends on management’s willingness to cash out non-insider shareholders.

      So far since the reverse split announcement 1147k shares changed hands. There were probably some day traders involved and also some speculators who bought into the transaction and then sold out later. My guess that the actual figure of new odd lot accounts is around 70% of total volume, meaning around 800 new odd-lot accounts. This compares to 225 odd-lot accounts that management estimated in their filling.

      To cash out all of these accounts the expense would be $0.8m.- management clearly has sufficient cash to do this ($2.6m cash available). And the cost savings from cashing out smaller shareholders would still make this transaction worthwhile.

      As I wrote in the comment on the 6th of Jan – the key here are motives of the insiders (who control 60% of the company) – do they simply want cost savings or do they want to increase their holding in the company right before results start improving:

      “Motives of insiders are not fully clear here. If business started gaining traction, insiders might be willing to cash out the remaining shareholders on the cheap before better performance is reflected in financials. Just speculating here, but if revenues reach the levels seen in 2015 and continue to grow (and that is quite possible if new clients mentioned during the call materialize in $$), then equity would be worth multiples of today’s price. Having said that, it is also entirely possible that management is simply looking for ways to prolong their reign on the declining cash-pile, and therefore look for easiest cost cuts outside their own salaries.”

      Q4 results might shed some light on this – but these will be released only in mid-March.

  9. Kevin Cox

    I am still confused about holding the shares in your name – I used IB for my 999 shares. Do I need to instruct them to hold them in my name?

    1. Nick Meilinger

      The passus regarding held in street name stockholders is still included – Any need to contact IB to get a confirmation for the stocks held?

      1. dt

        I think it is the same as before.

        “What if I hold fewer than 1,000 shares of common stock and hold all of my shares in street name?

        If you hold fewer than 1,000 shares of our common stock in street name, your broker, bank or other nominee is considered the stockholder of record with respect to those shares and not you. It is possible that the bank, broker or other nominee also holds shares for other beneficial owners of our common stock and that it may hold 1,000 or more total shares. Therefore, depending upon their procedures, they may not be obligated to treat the reverse stock split as affecting beneficial owners’ shares. It is our desire to treat stockholders holding fewer than 1,000 shares of our common stock in street name through a nominee (such as a bank or broker) in the same manner as stockholders whose shares are registered in their name. However, we or our transfer agent, Manhattan Transfer Registrar Company, may not have the necessary information to compare your record holdings with any shares that you may hold in street name in a brokerage account and these banks, brokers and other nominees may have different procedures for processing the reverse stock split. Accordingly, if you hold your shares of our common stock in street name, we encourage you to contact your bank, broker or other nominee.”

        IB so far always calculated beneficial interest correctly.

        Interestingly, they have not adjusted the amount required to cash out odd-lot holders, even-though it is clearly materially higher now. Market does not believe the reverse split will happen as currently described.

    1. dt

      I still strongly doubt the company will carry out the reverse split as indicated, unless the real intention is to cash-out outside shareholders on the cheap so that insiders own more – but in that case insiders would probably be buying right now as well.

      I have closed my position as I currently see the risk of reverse-split getting cancelled too high. Market seems to agree, as the spread to the cash-out price remains stubbornly high. Q4 results might shed some further light into the true intentions of management and business performance going forward (particularly with regards to new products). But Q4 results will be released only in mid March, so I might miss out if the reverse split actually happens in the meantime.

  10. Brian Morse

    Given all the considerations mentioned, does buying 999 shares in ordinary IB account for 0.51$ seem like a good risk/reward play or not? TY.

    1. dt

      If you are in only for reverse split, then risk is that the transaction is cancelled and shares revert to pre announcement levels of c $0.40 and if transaction proceeds as described you would get cashed out at $0.8/share. So risk reward from $0.51 level seems to be -$0.11 vs $0.29. I am not sure about probabilities here, but if the deal has more than 25% chance of going through, then this would be a good trade.
      Also there is a further upside optionality with Q4 results – if the business starts gaining traction (as management expects), then shares are cheap even at $0.8/share levels. On the other hand if the results disappoint and transaction gets cancelled, shares might drop below $0.40.

    1. dt

      The new filling still does not include the updated figure of odd-lot accounts, so the company is basically republishing the same proxy as before. Thus IMHO this filling does not add any further clarity with regards to likelihood of the deal happening.

      1. João Antão

        True, although if they had changed their minds about the odd-lot deal, they would not be republishing the same text. I see this as a slight positive sign, although with limited significance.

  11. Makarid

    Do you know if there is some legal thing about the number of sec fillings that they must publish about the transaction?For example they must publish 4 sec fillings until the going-private transaction or they publish them because they want to add some more light? Thanks a lot!

    1. dt

      I believe they have to re-file proxy document after amendment is made. Although I am not able to tell what kind of amendments have been made.

  12. slow

    1-Mar-2017

    Termination of a Material Definitive Agreement

    Item 1.02 Termination of a Material Definitive Agreement.
    On February 27, 2017, Paybox Corp (the “Company”) was informed by International Business Machine Corporation (“IBM”) that IBM was terminating the larger of two agreements with the Company, whereby the Company provides e-invoice services to IBM’s operating units, effective September 1, 2017. The agreement had been scheduled to expire on December 31, 2017, and IBM exercised its right under the agreement to terminate on 180 days advance notice.
    Approximately 35.1% of the Company’s revenues were attributable to this agreement with IBM in the year ended December 31, 2016. It is possible that the Company may continue to provide certain services relating to this agreement on a month-to-month basis following termination.

    Will this affect the going private ?

  13. Jamie Schmidt

    Well — any idea how to quantify how bad the new news is?

    1. dt

      This is a huge negative and puts the whole turnaround of the company into question.
      This also decreases the likelihood of reverse split going through as Paybox might want to conserve cash ahead of expected sharp revenue drop.
      There is still a chance that new products for the banking industry started to pick up in the recent quarter and will make up for the expected revenue shortfall from Sep 2017 onward (more on that in Q4 results expected by mid March). If that is the case then there might still be some hope for the reverse split, however otherwise I think the transaction is dead.

      1. FM

        Regarding “new products for the banking industry”, where did you get it from? Anywhere can check for detailed info about this? Thank you.

        1. dt

          FM, its from the Q3 conference call:

          “PAYBOX’s integrated receivables process as a white label solution that we sell in a channel relationship with bank and financial institution partners to benefit their large corporate customers. It is our core product with the routing approval and matching of remittance information to provide an audited, complete electronic file. With our first big partnership, we are live, we’re in the process of going live with nine other U.S.-based enterprise customers.”

          “So we’re really starting to see some predictability in the bank channel and continued progress with those clients. So we’re not only seeing new clients coming into that bank channel offering, but we’re seeing growth in the invoice volume.”

          http://seekingalpha.com/article/4023278-payboxs-diri-ceo-matthew-oakes-q3-2016-results-earnings-call-transcript?part=single

  14. PhilipF

    We also still don’t know when the vote will be if it’s going to happen. On 2/24 they filed a preliminary copy of the
    “NOTICE OF SPECIAL MEETING OF STOCKHOLDERS”, but there are still no set dates. (https://www.sec.gov/Archives/edgar/data/879703/000165495417001439/pbox_prer14a.htm)

    Add in the likely loss of 30% of their revenue and this looks a lot worse. As of 3/1, the stock tanked more than 20%.

    Interestingly, there are four directors that receive restricted stock grants in lieu of cash payments each quarter, and they’re still getting those grants. Is this a good sign?:
    - http://archive.fast-edgar.com//20170104/AUAZC22CZ222A2Z2222822ZZLG8AZNI25Y92/
    - http://archive.fast-edgar.com//20170104/A6AZN22CZ222I2Z2222K22ZZAW4NZNI25O92/
    - http://archive.fast-edgar.com//20170104/ATAZO22CZ222V2Z2222N22ZZJSTPZNI25E92/
    - http://archive.fast-edgar.com//20170104/AOAZT22CZ222H2Z2222M22ZZNIJMZNI25492/

    1. dt

      I do not think these director grants are indicative of PBOX prospects. These are just part of pre-agreed compensation package.

  15. Makarid

    The stock has lost 40% in a day.The effect of the cancelation will be seen after Semptember.Also in the 8-K the last sentence says:” It is possible that the Company may continue to provide certain services relating to this agreement on a month-to-month basis following termination”. Maybe it is a good opportunity for the management to add some more shares if they want to still take the company private,because they will reduce the amount to pay to minority holders.Also the NCAV of the Paybox is 0.206$/per share.I will consider to average down.

    1. dt

      Makarid, I also think that PBOX at $0.2/share is a good bet even without the reverse split.
      However, if IBM’s revenues are not replaced by revenues from new clients, then PBOX will turn into a cash burn machine. My rough estimates show that cash burn would be c. $1m annually, assuming that PBOX will not be able to reduce costs proportionally. So in that case cash buffer would disappear quite fast.

    2. PhilipF

      Hi Makarid. I’m new to applying NCAV. Can you help me understand how you reached $0.206 / share?

      As I understand it, NCAV = (Current Assets -Total Liabilities) / # Shares Outstanding

      As of 9/30/2016 8-K https://www.sec.gov/Archives/edgar/data/879703/000165495416003784/diri_ex991.htm
      Current Assets = $4,312,000 and Total Liabilities = $1,616,00

      It seems a little trickier to get the shares outstanding.

      Per 2016/09/30 8-K (https://www.sec.gov/Archives/edgar/data/879703/000165495416003784/diri_ex991.htm) there were 13,009,000 shares outstanding
      Per 2016/11/09 10-Q, (https://www.sec.gov/Archives/edgar/data/879703/000165495416003753/diri_10q.htm) there were 13,077,046 shares outstanding
      Per 2016/12/29 SC 13E3/A (https://www.sec.gov/Archives/edgar/data/879703/000165495417001441/pbox_sc13e3.htm) there were 12,988,282 shares outstanding

      Based on the formula as I understand it and these numbers, it appears NCAV = $0.319 on 2016/09/30, $0.317 on 2016/11/09, and $0.320 on 2016/12/29.

      Did I miss including some shares outstanding? Please clarify how you got your numbers and NCAV. I’m hoping to learn from your experience since you seem on top of things.

      Thanks!

      1. dt

        Philip, I think you are making a mathematical error in your calculations – total liabilities are $1.6m instead of $0.16m.

  16. Jamie Schmidt

    It’s hard to believe that this is out of the blue. The way I figure it, management must have been aware of this prior to announcing the reverse stock split, or at least knew that the contract loss was highly likely.

    1. dt

      Jamie, I had similar thoughts, but we can only guess the true intentions of management.

  17. PhilipF

    I have a general question for you all. How are you getting these reverse stock splits in your name instead of the street name? It seems this is a critical step in making deals like this work.

    Thanks for your advice!

    1. dt

      Philip, you should not need shares to be transferred to your own name for PBOX reverse-split. As per SEC filling:
      ” It is our desire to treat stockholders holding fewer than 1,000 shares of our common stock in street name through a nominee (such as a bank or broker) in the same manner as stockholders whose shares are registered in their name.”

      For general discussion on becoming record holder, please refer to discussion under LIME:
      http://www.specialsituationinvestments.com/2016/10/lime-energy-lime-going-private-24-upside-record-holders-only/

    1. dt

      Philip, I no longer have PBOX, sold if out when the shares failed to move closer to $0.8 (the expected cash-out price) and number of odd-lot accounts continued to increase on a daily basis.

      With regards to stock incentive plan – you might be right, but also management might want to try launching a new stock incentive plan and therefore cancelling the registered shares under previous one.

      I think slightly more alarming is that CFO resigned.
      https://www.sec.gov/Archives/edgar/data/879703/000165495417002021/pbox_8k.htm

  18. Michael Lax

    For someone who bought at .55, they would have about a 48% loss. Perhaps trades can be labeled according to their risk levels, to guide allocation of capital and risk decisions. Also, shouldn’t this trade result be posted on the performance column?

    1. dt

      Michael, I have stated a number of times that the risk of this deal getting cancelled is very high (see the comments above as well as Feb 2017 Update). Due to shares failing to move closer to the cash-out price, increasing number of odd lot accounts and willing sellers far below the cash-out price I have closed the position (zero return) and was fully transparent about that. As for performance column, only the trades that are no longer active are posted in the results column.

  19. dt

    Paybox published annual report. It is really strange that this report came out without quarterly earnings press release or conference call. No idea why.

    From financial perspective it was an ordinary quarter with no visible new revenue wins from new clients yet – thus management’s optimism on new banking clients has not turned into dollars yet. Quarter was unprofitable and company burned through c. $0.2m of cash in operations.

    I mentioned a number of times that Q4 results might provide some insight into the true intentions of management in carrying out the reverse split (cost savings vs willing to have higher share of the company for themselves). So far the business does not seem to be gaining traction, which suggests that the reverse-split was likely intended only for the cost saving purposes. With IBM walking away, no visible revenue from new banking clients and continued cash burn I do not believe the company will pursue the reverse split on previous terms – the cash-out price will likely be reduced to reflect new realities (or the reverse split will not be carried out).

    Also a very odd detail – PBOX already wasted $260k in relation to the reverse split. That is only for the regulatory filling (and all the work to prepare it) as well as announcement to shareholders. This kind of sum for one filling seems truly absurd.

      1. dt

        Indeed that’s the case. The terms of going private have been changed and shareholders owning fewer than 200 shares will be cashed out at $0.4/share.

  20. Michael

    I have a hard time reading the SEC document. Can somebody please let me know if we will get $0.40 per share, and if yes, when?

    1. dt

      Shareholder meeting to vote on reverse split is set for the 3rd of May. As majority of stock is owned by insiders, approval is very likely. Effective date for the reverse split has not been set yet.

      However, the management might still change the terms of the reverse split, as it has already done before.

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